Comment: The Political Fed

So Alan Greenspan is a political
animal. What--you were expecting a philosopher-king? A lot of people
who should know better were taken by surprise when Fed Chairman
Greenspan made George W. Bush's inaugural week by embracing a big tax
cut. But it's not as if Greenspan got this far on, say, charm. As Bob
Woodward's recent biography of him makes clear, Greenspan for more than
a decade outmaneuvered other members of the Fed's board of governors and
made such tactical alliances as he needed to survive.

One such temporary alliance was with Bill Clinton. Once Clinton agreed
to the stringent program of deficit reduction the Fed wanted, Greenspan
was willing to make Clinton look good. The Fed not only cut interest
rates, but Greenspan gamely sat next to Hillary during the president's
State of the Union address and applauded the Clinton program. Clinton,
not surprisingly, reappointed Greenspan.

But that was then. With a new chief executive comes a new agenda. And it
will fall to the new president to decide whether to reappoint Greenspan
when the latter's term expires in 2004.

There has been bad blood between Greenspan and the Bushies. During the
previous Bush family administration, relations grew so frosty that
Treasury Secretary Nick Brady and Greenspan actually suspended their
weekly meetings. Jim Baker even talked of easing Greenspan out. And the
first President Bush blamed Greenspan, not without some justice, for
failing to ease interest rates in time to rescue his presidency from the
political effects of the 1990-1991 recession.

It was shrewd of Greenspan to extend an olive branch to the Bushes--and
some olive branch it was. The press, which had been guardedly laudatory
of W.'s maiden voyage around Washington, turned euphoric. Suddenly,
carrying the ultimate seal of approval, the Bush tax cut seemed
politically supercharged.

Nor should we be shocked to hear that the Fed chairman prefers tax cuts
to public spending. Greenspan, at heart, is a conservative Republican
who grew up on Wall Street. His first intellectual mentor was Ayn Rand,
not exactly the queen of tax-and-spend. Greenspan got into national
politics advising Richard Nixon, then served as Gerald Ford's chief
economic adviser, and was appointed Fed chairman by Ronald Reagan. The
real anomaly was Greenspan's temporary liaison with Clinton and the
Democrats.

It's no surprise that Alan Greenspan doesn't care much for public
outlay. His logic in supporting a tax cut, however, was a tortured
exercise in finding a basis for political alliance with Bush. The first
flaw in Greenspan's case for a tax cut is his stated worry that the
government, by running large surpluses, would eventually hold too large
a portfolio of private assets. But the surpluses could be consumed
replenishing Social Security. And even in the unlikely eventuality that
surpluses go on indefinitely, there is nothing wrong with the Social
Security system or even the U.S. Treasury owning nongovernment
securities, so long as they are blue-chip and safely diversified.

The other bogus argument is Greenspan's claim that a tax cut is
inherently superior to public outlay as a means of depleting the
surplus. This view is an ideological preference, not a technical
imperative. As a matter of macroeconomics, the effects are identical.
Moreover, advising Congress on whether to cut taxes or increase spending
is none of the Fed's business. Its charter, in case we are all so
dazzled by Greenspan, is monetary policy and bank regulation.

Greenspan's sudden conversion to the tax-cut crusade blindsided centrist
Democrats, who have largely abandoned the cause of public investment in
favor of debt paydown. They had it coming. Moderate Democrats like
economists Robert Reischauer of the Urban Institute, Alice Rivlin of
Brookings, and even our estimable friend Robert Greenstein of the Center
on Budget and Policy Priorities, calculated that debt retirement was the
best strategy to soak up the surplus and thus keep Republicans from
giving it away as a tax cut. They counted on Greenspan's innate fiscal
conservatism, overlooking his deeper ideological conservatism and
personal opportunism.

In a stream of op-eds, Reischauer, Rivlin, and others have warned that
the surplus really isn't as big as we think, that we will need it when
the boomers retire, that a recession may come, and so forth. But the
surplus just keeps on growing. It will soon reach more than half a
trillion dollars a year and keep climbing. The fact is, with the economy
on a higher long-term growth path and spending more or less capped by
the 1997 budget deal, the surplus is permanent and structural. That
leaves plenty of money for a tax cut--or something.

What's tragically missing from
this debate, of course, is a vigorous case for public investment. In the
new economy, private markets don't provide the social supports that
ordinary people need to keep the market's vaunted "flexibility" from
buffeting their lives. Only government can provide universal health
care, enriched child care, decent education, and modernization of
outdated public infrastructure. And universal social programs have long
been the glue in an otherwise fractious progressive political coalition.
As Republicans know too well, once a permanent change in the tax code
wipes out these surpluses, the chance for politically painless public
outlay will be gone.

Instead of embracing a weak technical argument, we should be forging
a vigorous national debate. Pay-off-the-debt was always dubious politics
as well as odd policy, and now Alan Greenspan has administered the coup
de grace. He's done us a favor. Now we can revive the case for serious
public outlay. Drug coverage for all versus millionaire tax relief is
not a bad politics. Any takers? ¤